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CKH preferred stock. On its 1998 return, petitioner reported
$441,190 of miscellaneous income in connection with its receipt
of 44,119 shares of AeroCentury stock from Cap Corp.
On February 15, 2001, during respondent’s examination of the
1997 tax return, petitioner submitted an informal claim asserting
that it was entitled to an additional ordinary loss deduction in
an amount exceeding $2 million in connection with the debt
conversion transaction. In its informal claim, petitioner
asserted: (1) CKH’s only valuable asset was CKS; and (2) since
CKS’s filing for bankruptcy under chapter 7 of the Bankruptcy
Code in 1998, CKS has been in the process of liquidation.
Petitioner also maintained that ignoring the speculative goodwill
attributable to CKS, CKH had a net worth of approximately
$120,000 after the debt conversion transaction.
In the notice of deficiency for 1997, respondent disallowed
the additional ordinary loss informally claimed and the
$1,859,135 bad debt deduction. Among other things, respondent
determined: (1) The claimed ordinary loss and bad debt deduction
were not allowable because they represented capital expenditures;
and (2) it had not been established that petitioner’s reported
$1,859,135 bad debt became worthless during 1997.
In its petition, petitioner claimed a $2,052,900 ordinary
loss regarding CKH’s assumption of Cap Corp.’s $2.259 million
debt to petitioner and/or petitioner’s cancellation of that debt
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